The EU Energy Union Blueprint – One Voice, Different Interests

On Wednesday, Feb. 25, EU Energy Commissioner Maros Sefcovic presented an Energy Union proposal to supply Eastern Europe with gas from domestic sources. This draft document, which was made available to The Guardian, details another “paper” plan by EU officials that is completely out of touch with any sort of realistic system for providing energy as well as the interests of the oil and gas industry in the end-users’ countries.

Within the rich history of meaningless documents and projects on the theme of EU energy self-sufficiency, Maros Sefcovic’s project was preceded by the stillborn Nabucco pipeline, the Southern Gas Corridor, and a host of other initiatives. None of these ventures ever got past the stage of issuing memoranda of cooperation. At their first opportunity, the energy corporations ditched the idealists from Brussels and continued their focus on the interests of their clients.

Conseil_Tenu_par_les_RatsIn addition to the usual EU hedging, this time the presentation by the new Energy Union was accompanied by pompous references to the union’s origins in 1950, the alliance of coal and steel producers, and Franklin Roosevelt’s New Deal (“a new deal for energy consumers”). It is no recent revelation that when an EU bureaucrat suddenly brings up “values” and begins lamenting the self-serving interests of national corporate players, affairs in Brussels are going worse than ever. The whole narrative of Russia’s “excommunication” from EU consumers due to her sins in Ukraine is starting to resemble Aesop’s famous fable about an assembly of mice who convene in order to hang a bell on a cat (“They were accepting the proposal with great enthusiasm and applause, until a quiet old mouse stood up to speak, ‘Tis well said, but which one of us will put the bell around cat’s neck?’”).

The truth is that Ukraine’s latest refusal to pay its gas bills has been an unpleasant surprise for EU officials. Maros Sefcovic even said at a news conference that the issues of supplies and the price of gas for Donetsk and Luhansk regions will be treated separately from the “winter gas package” that guarantees deliveries this winter. In other words, Brussels de facto confirms the special economic status of these disputed territories.

No one wants to be responsible for wiping out Ukraine as a transit country because of a civil war in the center of Europe. Therefore the idea of an “energy union that speaks with one voice in global affairs” is being hastily concocted. Countries with diverse energy mixes, various configurations for their national energy consumption, and differing levels of industrial development are being strongly advised to coordinate their energy agenda with the former European Commissioner for Youth. The document is silent about whether the German energy conglomerates and French nuclear experts will want to “speak with one voice” together with consumers in power-hungry Moldova. It is not unreasonable to believe that those voices will be different.


Collective action problems in the EU do not arise because of conflicting values or Moscow sympathies. Cooperation with Russia is beneficial to Hungary, Greece, and other regional players because they have spent decades (1970-1990) forging energy ties with other countries of Eastern Europe with the help of the former Soviet Union. Forced to choose between paper projects vs. cheap energy for their constituents, any sensible politician would opt for the latter. What’s more, any head of state who authorizes Brussels to “veto” a bilateral agreement on an energy partnership will appear, in the eyes of his own countrymen, to be selling off the nation’s sovereignty. The fact is, the 28 national regulatory frameworks that have currently been adopted by the EU member states, in contrast to many documents from Brussels, do not exist merely to flaunt their beautiful infographics at press briefings. National energy legislation reflects the specific interests of the oil and gas, coal, and nuclear industries, as well as that of the trade unions in each nation.

Curiously, the political goal of allowing strict supranational regulation from Brussels over the economy coexists in the document with entirely liberal appeals “to reduce administrative barriers.” Conceptually the new Energy Union is an odd, two-headed monster, born – one must understand –out of EU commissioners’ desire to regulate the foreign trade of corporations within national states. From a practical point of view, the document has only one important psychological function, which is to act as a type of inspiring fairy tale for Ukraine’s weakened economy – a gesture of EU’s goodwill on the part of those who are responsible for gas talks in Kyiv.

Ukraine To Disappear From EU Energy Picture By 2019

Ukraine To Disappear From EU Energy Picture By 2019

The modest installment payments that Ukraine is making on its $2.440 billion debt to Gazprom are not enough to restore the reputation of that country as a reliable transit partner. Since Russian gas is being persistently redirected south and east, Kiev’s role as an intermediary for Europe’s gas might slowly wane between now and 2019.

The “Turkish Stream” – the alternative route that the Western business press has described as “just another attempt to blackmail the EU” – is beginning to take tangible shape. The longer of two potential routes of the new pipeline has been selected. It will follow South Stream’s proposed undersea corridor, but veering off at the end in order to land on the Turkish coast, instead of emerging in Bulgaria next door.


Turkish Stream

Gazprom and the Turkish company Botas Petroleum Pipeline Corporation have confirmed their intention to pump the initial shipment of natural gas into Turkey through the new pipeline in December 2016. The bilateral agreement will be signed before the end of the second quarter of 2015. These latest negotiations to get “Turkish Stream” up and running is a clear signal to the European Union that Gazprom’s southern detour is being developed in with an eye toward the future. And there is no Ukraine in that future.

Ultimately, a civil war in a transit country should be seen as an example of force majeure, and one in which Germany, France and Poland themselves had a hand in creating back in February 2014. Yet EU Energy Commissioner Maroš Šef?ovi? still believes that gas transit through Ukraine is a “better option”. However, first the EU will have to explain to its member states why on earth the Southern European consumers would need Kyiv as a mediator. Today Ukraine is on the brink of sovereign default and is known for siphoning off natural gas for its own needs.


EU Energy Commissioner Maroš Šefčovič

The current contract between Gazprom and Naftogaz Ukraine will expire in 2019, reducing to zero these risks of natural gas transit via Ukraine. In addition, the construction of a gas hub on the Turkish-Greek border will force the delivery map for the continent’s energy supplies to be redrawn, and it could diminish the role of Austria’s Baumgarten hub, which is currently the region’s primary gas-distribution center. Four years is very little time in which to create new projects.

If the European Commission wants to get gas from Turkey by 2020, then it is high time it starts building infrastructure – in full accordance with the “Third Energy Package” or any other legal restrictions that the Europeans deem necessary. Otherwise, Brussels will be left with a dubious asset on its balance sheet, in the form of a Western fragment of Ukraine (the European equivalent of what Somalia was in 2009), which will have to be subsidized using various ploys for semi legal “reverse flows” of Russian gas purchased through Turkey.

The flexible structure for obtaining gas supplies via the “Turkish Stream” allows a number of potential options for the interim 2016-2019 period, but the final configuration of the gas network will depend on how far the EU’s energy leaders are willing to pursue their suicidal policy of rejecting Russian resources. While Brussels is complaining about Russia’s efforts to make Ukraine pay its natural gas bills, other countries, such as Hungary, Greece, and Serbia, seem more open to the opportunities of the “Turkish Stream”.

Hungarian Prime Minister Viktor Orbán, for example, is sure that the EU’s economic sanctions are “in conflict with Hungary’s interests” and he intends, in his words, “to come to terms with Russia on a gas agreement” during a meeting with Russian President Vladimir Putin in Budapest on Feb.17. No one is likely to accuse this conservative politician of being enamored of Russian gas, after he declared that Hungary must avoid becoming the “happiest barrack of Gazprom”, as the Los Angeles Times reminds us. Nevertheless, the pragmatic approach has prevailed in Hungary.

An increasing numbers of South European countries view themselves as potential replacements for Ukraine in Russia’s new gas-delivery route. Bulgaria, with her modest energy resources, might be one exception – she threw in her lot with the losers when she bowed to unprecedented political pressure in regard to gas issues.

The states that were at least somewhat able to defend their right to energy sovereignty are now among the winners. And those who followed the advice of European bureaucrats, sacrificing their gas trade in order to join in the general chorus “demonizing” Russia for the events in Ukraine, will take a big hit.

Russian Gas Provides Lifeline To Chinese Expansion

Russian Gas Provides Lifeline To Chinese Expansion

he shale gas game began to cool in China after the latest plunge in oil prices. However, thanks to the recently concluded Power of Siberia pipeline deal, Beijing will be able to rely on a stable supply of natural gas from Russia during a highly volatile time for the market.

Ever since 2010, when the State Dept. first introduced fracking as a panacea for all energy problems, the technology has transformed the US energy sector, but it has remained more of a psychological phenomenon in Asia. The fracking game is over in both China and continental Europe, as a result of the recent plunge in oil prices.

The majority of the existing agreements within the Chinese market have made little progress beyond the preliminary stage of studying the oil and gas fields. Jim O’Neill’s classic advice, “never… attempt to forecast the price of oil,” has become a self-fulfilling prophecy for shale-oil projects outside the United States (here’s an insider tip: if you hear someone claim to “sense the trend” on the current oil market, feel free to kick that liar in the name of science – at least verbally). Suffice it to say that in the golden days of the fracking bubble, even the bestselling author and pundit Daniel Yergin fell into the trap of trying to forecast the Chinese shale bonanza.

Image Source: Platts

Three years ago, with the help of major global energy companies, Chinese state corporations invested about $7 billion in 400 wells across China, including 130 wells drilled horizontally. In hindsight, China’s attempt to import fracking technology “as is” from the United States to Sichuan Province was neither economically feasible nor environmentally friendly. At first, the production profiles for shale deposits in Sichuan were as high as 60 billion cm/year. But in August 2014, China halved the quantum of shale gas it expects to produce by 2020, after early exploration efforts to unlock this unconventional fuel resulted in an explosion at a shale-gas drilling rig that reportedly killed eight workers in the small town of Jiaoshi.

Currently, wells in Sichuan cost about $13 million – much more than even the most expensive wells in North Dakota – and the gas-recovery rate in those Sichuan wells is below 20%. According to Bloomberg’s forecast, in 2015, shale will account for up to 3% of the country’s total gas consumption that year, which is not bad considering the immense scale of the Chinese energy market in real terms. However, shale output will not be able to satisfy the growing demand for natural gas in China, even assuming a quite modest 6.5% increase in nominal GDP. According to the Economist Intelligence Unit industry report on energy (2014), total energy consumption in China will reach 3,550.2 million tons of oil equivalent by 2020. In short, there’s houseroom for everybody in the Chinese market.

China needs Russia’s natural gas and remains a crucial market for Russia to enter, and now Russia’s natural gas exports to China will expand thanks to the Power of Siberia pipeline. This agreement is a gateway to bilateral energy cooperation between these two BRICS leaders. It is a win-win deal that was reached after a decade of difficult negotiations, and is not merely a “response” to sanctions. It was never intended as any sort of retaliatory move. The energy partnership between Russia and China began long before the European Union helped to destabilize Ukraine while embracing the suicidal policy of cutting itself off from Eurasian resources through legislative barriers like the Third Energy Package. In 2014 Russia’s biggest energy company, Gazprom, was finally able to break through to the largest consumer in Asia because of other success stories, i.e., the ESPO pipeline and the adoption of better practices throughout the Russian energy industry. “We have signed agreements to increase crude oil supplies, created joint ventures for oil exploration and production in Russia, and started the construction of a large joint refinery in China. Chinese companies have joined gas projects on the Russian Arctic and Sakhalin shelf,” summarized Deputy Foreign Minister Igor Morgulov in his interview with the Xinhua news agency on Jan. 13, 2015.

Long-term natural-gas contracts may take years to iron out and conclude. However, at present they are far more reliable than unconventional gas or green alternatives. Once finalized, bilateral long-term agreements remain in full force for decades, despite inevitable periods of high volatility in energy prices.

EU Fracking Boom Becoming Less Likely

EU Fracking Boom Becoming Less Likely

Pro-fracking campaign in the global media is fading fast. A year or two ago the extraction method suitable for the Arizona desert was presented as a key component of the EU’s energy security policy by high-ranking officials in the European Commission. Many large corporations that announced an influx of investment into Eastern European fracking projects between 2010 and 2013 are now gradually reducing the scope of their planned work. Their decision was prompted by environmental and political problems that receive insufficient coverage in the industry media. It’s becoming clear that fracking technology can’t be brought to the EU “as is” from the United States.

Recently published data by Rice University, Texas indicates that simple recycling of the tainted waste water is not safe, writes. A year or two ago supporters of hydraulic fracturing used to preach about “green innovations in the shale revolution” with the passion of small-town televangelists, but now, after the publication of new data, they have switched tactics and simply remain silent about environmental problems. Yet concerned citizens of New York City are more aware. “Making fracking safe is simply not possible, not with the current technology, or with the inadequate regulations being proposed,” Louis Allstadt, former executive vice president of Mobil Oil, said during a news conference in Albany called by the anti-fracking group Elected Officials to Protect New York.

What did the U.S. State Department do with a not-so-green technology that is too dangerous to use at home? Export it to the closest allies in Europe, of course. Nor should one forget that in the United States itself, the “shale bubble” would have been impossible without the direct support of U.S. Dept. of Energy programs, as well as the backing of Hillary Clinton’s State Dept., which pushed the issue on an international, political level.

In 2011 Forbes was painting the optimistic forecasts about the future of shale gas in the EU, but today there are at least a few reasons why these claims have been left hanging. Lawmakers in Europe have strictly limited the use of fracking technology in some EU countries, such as France, the Czech Republic, Bulgaria, and to a certain extent in Germany. Even in the United Kingdom, where legislators usually follow the US lead and take a much more optimistic view of fracking, a special parliamentary commission concluded in May 2011 that the nation’s explored shale reserves hardly merited the title of a “shale revolution”. Given the rising global demand for energy (up by 40% according to IEA estimates), shale gas will do no more than find its own niche within the British energy mix. And there is absolutely no reason to believe that continental Europe, with the strictest environmental legislation in the world, would accept shale more readily than the British Isles.

The current seasonal decline in oil prices has also been interpreted by some of Russia’s former energy officials as a direct consequence of the shale revolution. The predictions are being made about the impending end of the “oil era” and the cheap American energy that will soon be flooding the European market. Thus it is important to note that the very low cost of oil will make it completely unprofitable to develop oil fields using hydraulic fracturing technology. In other words, dreams of a“post-carbon era” will not come true within a reasonable planning time-frame. And OPEC members are unlikely to want a repeat of the landslide of prices, which deeply frightened many Middle Eastern and African countries in 1985-86. Today Saudi Arabia’s budget for 2015 was calculated based on an oil price of $98 per barrel, Nigeria proposed a $78/b oil price benchmark. Global price forecasts vary from conservative $70 (Goldman Sachs, Commerzbank) to bullish $100-105 (Barclay’s, Standard Chartered). Note that both price forecasts set a limit to the use of shale in Europe.


The three main arguments made by the exporters of fracking technology to Eastern Europe look particularly controversial today. Let us take a look at these arguments in the light of the new data.

1. Fracking imports to Europe are needed here and now, “as is,” with no need to take into account the economic situation in each EU country or its economic potential.

The promotion of fracking technology cannot significantly affect the Eastern European market without factoring in each country’s economic situation, as well as the local and regional energy balance, infrastructure, and logistics. In every country, be it Bulgaria, Serbia, or France, there are interest groups (lobbies for nuclear energy, coal, etc.) ready to defend their share of the national energy mix. Reformatting the local market is a task that will keep European bureaucrats busy for years, if not decades. Local conditions always dictate the rules of the game. The most striking example is the recent failure of the Shell project to produce shale gas in the Donbass region. Of course, a bloody civil war is an unusual type of force majeure, but at the same time, this case is a good example of a corporation that pulled out because of sudden problems in the field.

2. Any damage fracking causes to the environment can be predicted and the risk managed using business procedures that have been previously tested in the U.S.

Although the damage from fracking may seem common knowledge, in fact, the subject of environmental oversight is still quite critical. Ask the local residents about earthquakes in Great Britain, look into water poisoning in Poland. Judge for yourself the scale of the farmers’ revolt in France and Romania. The farmers understand – the corporations using fracturing liquid that poses a threat to ground-water reservoirs have a tendency to waltz in, make their money, and leave, while their children have to grow up on poisoned land. Practices that have caused problems even in the vast deserts of the southwestern American states could lead to a new Chernobyl in the densely populated countries of the EU. However, for many Euro-Atlantic politicians fracking represents the latest path to energy security and a way to “contain” Russia, making this the wrong time for discussions of its safety or economic viability (too many careers in Brussels are dependent on the confrontational style of energy policy).

3. The shale revolution can quickly “liberate” Europe from its dependence on piped-in gas and long-term contracts.

An important advantage of pipeline supplies provided under long-term contracts is their predictability and stability. Moscow continues to scrupulously fulfill its contractual obligations, and thus the underground gas-storage facilities in Western Europe are not running low on Russian gas despite the new “Ice Age” – stemming from the problems in Ukraine – that has overtaken the relationship between Russia and the EU. The Euronews television channel has a lot to say about the importance of shale gas and alternate supply routes (such as the TAP), but few officials in the European Commission see these projects as realistic – just take a look at the EU’s policy papers. EU officials avoid wishful thinking when composing documents for their own consumption, noting such facts as: production in Norway is declining; the South Stream pipeline – viewed objectively – is indispensable; LNG from Qatar is expensive and the Japanese will be vying for it as well; and so on. Long-term contractual commitments stabilize the market, prevent the spread of non-transparent re-export schemes, and provide German industry with the raw materials needed to revive the EU economy. As noted by the Austrian energy expert Klaus Warum, in the EU the term “Security of Supply” is used by the European officials to describe what is actually a form of unfair competition in the energy market.

Thus, it is unlikely that we can expect to see a repeat of the American “shale boom” in the next few years here in Europe. Fracking will certainly be limited in Europe (5-15% of the market, depending on local conditions). There has been so much bluster by EU officials about winning “the EU’s independence from Russia” using American technology that now they cannot just abruptly abandon the dream of “freedom gas.” The obvious advantages of utilizing the major gas-delivery routes, as well as a trading system based on long-term contracts, will counteract the effect of any dramatic increase in the role of shale gas in the EU’s energy systems.

Curious contradiction is striking. On the one hand, strident claims of how the “shale boom” is going to liberate Europe continue to be published. On the other hand, a very unhealthy interest is arising in the creation of regulatory risks that affect the supply and storage infrastructure (the technical and economic parameters, the bureaucracy surrounding the OPAL pipeline, the German media outrage over the sale of RWE Dea, etc.). Suffice it to cite one recent example of this type – a shocking statement from Michael Theurer, a member of the European Parliament from the Free Democratic Party (a pro-American and quasi-liberal party), claiming that if the gas-supply situation worsens, the gas-storage tanks of private foreign companies operating in Germany would need to be – drumroll please – “nationalized” (“gegebenenfalls durch Enteignung sichern”). This suggestion from a purported liberal that “private property be expropriated” was published not in some communist rag like Vorwarts!, but in Focus, an influential national weekly, in an important editorial on the gas issue. This leads one to the conclusion that if fracking were truly a panacea for the chaos in Ukraine, this “business-oriented” MP would be unlikely to threaten foreign investors with confiscation and expropriation.

If common sense is to be sacrificed in sanctions tit-for tat, Europe will have to use coal or expensive petroleum products, believes Dr. Pavel Zavalny, President of the Russian Gas Society, Deputy Chairman of the State Duma Committee on Energy. “If we look at the negative scenario, gas prices for Eastern and Central Europe could jump to $800 per 1 thousand cubic meters. It will also have a rippling effect in the Asian markets, as the European consumers will have to compete with Asian consumers.” The expert noted that, in case of tougher sectoral sanctions, Russia’s oil & gas industry will invest more in oil equipment and reorient its investment policy to China. In some cases it may entail a delay of completion of the projects on time and on budget. “This is not the first time in history sectoral sanctions are implemented against Russia. We always overcame all difficulties and became only stronger” – concluded Dr. Zavalny.

What should the European officials do now with their enormous collection of promotional materials touting fracking and expensive alternative energy sources? Probably toss it all in the trash, along with the pizza ads, and await the next “bubble.” Although it’s hard to say what that one will look like. But to get an idea, let’s look at the acknowledged leaders of public initiatives in the US. For example, the Bill & Melinda Gates Foundation, the world-famous endowment established by these genuine philanthropists, recently took an interest in a fuel source as ancient as the world itself – dry animal dung fuel. If the US State Dept. plugs its resources into the creation of dung-fuel propaganda, that will spawn an eco-friendly and energy-efficient candidate ripe for promotion as the next financial bubble and freedom fuel for “liberating” Eastern Europe. As they say, back to basics. And as a bonus – five years of fresh headlines in the international business press.

Martin Armstrong Warns The West: “Sanctioning Russia Is A Big Mistake”

Martin Armstrong Warns The West: “Sanctioning Russia Is A Big Mistake”

Via ZeroHedge Armstrong Economics:

“Politicians just keep making the same mistake over and over again. They perpetually turn to sanctions bankrupting private business with no respect whatsoever as the USA is wiping out farmers in Europe. But worst of all, there is not a single incident where sanctions have EVER worked even once. They often remain in place beyond a decade even as in Iran, but there is no change in politics.”



Three more points on sanctions against Russia:

  1. “Isolation” means broader import substitution and rapid re-industrialization of Russia’s oil & gas sector. Dr. Sergey Glazyev, full member of Russian Academy of Science, has been developing the theoretical framework for the second “revolution from above”  since the early 1990-es. For a number of reasons (including Russia’s wicked climate, of course) scientific, industrial and technological revolutions were often triggered by sanctions.
  2. Decades of economic sanctions made the Islamic Republic of Iran and the Soviet Union stronger. Both China and Iran have learnt the lesson of “Catastroyka” – total destruction of the national state (term introduced by philosopher, ex-dissident Alexander Zinovyev (“Perestroika” + “catastrophe”).
  3. Current turmoil that erupted in Russia’s foreign exchange/stock market will not affect the industrial sector. Barclays’ oil forecast assumed Russian oil production of around 10 million barrels a day would decline slightly by 20,000 barrels daily next year because of the sanctions (compare it, for instance, with hysterical fearmongering in the Russian “business” media).

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Punitive Isolation Will Do to Russia What Versailles Treaty Did to Germany by 

Has Ukraine Shot Itself in the Foot With Gas Pipeline Deal?

Has Ukraine Shot Itself in the Foot With Gas Pipeline Deal?

Last week, Ukrainian Prime Minister Yatsenyuk pushed a bill through the Verkhovna Rada that would see his country’s gas transportation system sold off to a group of international investors. The provisions of the law would permit the transit of natural gas to be blocked. This decision may hurt the fragile industrial recovery in Germany and finish off Ukraine’s potential as a gas transit route to Europe.

Germany, which is the industrial heart of the European Union and a major creditor for its debtor nations, is facing the challenge of the double-edged consequences of its inverted Ostpolitik as it pertains to the trade in natural gas. Even the temporary transit risks ensuing from Kiev’s decision to block the pipeline may cause a business slump.

The Nobel laureate Joseph Stiglitz offered an unnerving forecast for the German economy. The Columbia University professor, speaking at the conference in the southern German city of Lindau, described economic growth in the Eurozone as “sluggish.” The German economy in particular failed to grow during the second quarter, threatening the EU’s fragile industrial recovery.

In the years to come, coping with Kiev’s attempts to jeopardize the gas-transit system and cut off Europe from its quintessential energy source in the east could become a real headache for Germany’s foreign minister, Frank-Walter Steinmeier. The most vivid example of Ukraine’s self-destructive policy that has the potential to affect European taxpayers is the recent sale of its gas transportation system.

The imminent agreement, with many conflicting political overtones, will allow sales of 49 percent of Ukraine’s gas transportation system to a cobbled-together coalition of foreign shareholders.

First, the non-transparent deal — sponsored by high-ranking government officials — is a textbook case of restrictive practices that violate World Trade Organization rules. Secondly, the pipeline itself is anything but an attractive offer.

The major players in the European energy market are very well aware of the quality of the asset. They know that the pipeline is sorely in need of repair and is dependent on gas from a third party. According to some provisions of the law, the transit of natural gas through Ukraine can be blocked. If it really happens, the pipeline’s price will immediately plummet to $2 to $3 billion.

Who would buy a broken-down car that can only run using your neighbor’s gas?

ukraine_germany_gas_priceThat’s why, in July, Prime Minister Yatsenyuk was so interested in pushing the bill through the Verkhovna Rada that he threatened deputies with his resignation. Last week Mr. Yatsenyuk finally succeeded in passing the buck.

For many years, Ukraine has argued that its gas transportation system is an asset of national importance that wasn’t for sale. But the Euromaidan protests changed everything. Ukraine’s new media reported that Chevron wants to buy into the country’s transit company. While the official representatives of the corporation declined to comment on the “rumors,” last year Chevron co-sponsored a conference, “Ukraine in Washington 2013,” which starred the U.S. Assistant Secretary of State Victoria Nuland. Her deep involvement in Ukrainian politics, along with her unorthodox but honest vision of the EU, is generally well known.

In passing the new law, government officials in Kiev and the Verkhovna Rada (now dissolved) ignored the fact that the majority of business-savvy Ukrainian voters would never approve the all-Ukrainian referendum on the summertime sale of the country’s last reasonably valuable asset. After all, the industrial region of Donbass has been irrevocably lost and the country needs to collect taxes.

The situation surrounding the pipeline deal is reminiscent of the tactics of the United Fruit Company in the mid and late 1960s. Radically right-wing governments were installed in Central and Latin America and that corporation gained control over those countries’ main export, bananas.

In Eastern Europe, many countries are not ready to follow Ukraine’s footsteps and renounce energy sovereignty. It’s no longer fashionable to be a banana republic. The deep-seated crisis in Ukraine and the success story of Nord Stream have encouraged other EU countries, such as Hungary, to diversify their natural-gas supply routes. Hungary’s secretary of state for public diplomacy and relations, Zoltán Kovács, recently quoted a statement from his country’s prime minister, Viktor Orbán: “No one can question our sovereign right to guarantee our natural gas supplies.” The leaders in Budapest are sure that no economic recovery is possible in Germany and EU without long-term natural-gas contracts. All EU members will benefit from stable regional trade patterns.

Events in Ukraine should not dominate the agenda of the whole continent. That would simply be dangerous. It has already become a cliché to compare the Ukrainian crisis with the Spanish Civil War. A couple of years ago, the total “Ukrainization” of EU policy would have been perceived as a bad joke. Today 300,000 jobs are at stake in Germany and it is high time for Berlin to step in and prevent the nationalist frenzy in Kiev from ruining decades of successful business cooperation. Heiko Lohmann, a German natural-gas expert, believes that a fundamental prerequisite for normalization is the continuity of energy relations.

Viewed from this perspective, Hungary’s position looks much more “pro-European.” Interestingly, the EU’s official energy policy papers (the European Ten-Year Network Development Plan (TYNDP 2011-2020) and Energy Infrastructure Priorities for 2020 and Beyond) contradict the hardline political statements of the acting members of the European Commission. According to the published data, Brussels expects to increase natural gas imports from Russia up to 40 percent. Time will tell whether Ukraine’s problem-plagued gas transportation system will play any role in these plans.

Originally published by

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The Real Reason Shell Halted Its Ukrainian Shale Operations

Kiev Should Stop Playing Politics With Gas Debt

Kiev Should Stop Playing Politics With Gas Debt

Ukraine’s energy system can stay afloat only as long as the country’s underground gas-storage facilities are full. But by the end of the year the government in Kiev may start siphoning off natural gas destined for the European market.

The issue of natural gas has divided European opinion on the civil war in Ukraine. Brussels’ plan to force EU members into “energy solidarity” with the disintegrating state of Ukraine and to use illegal reversed gas flows is losing support. “The EU has no intention of repaying Ukraine’s debts for Russian gas,” said Dominique Ristori, the director general of the European Commission’s Directorate-General for Energy, adding that all debt problems should be settled through the International Monetary Fund.

The reference to the IMF is worthy of note. According to the Fund’s official statements, it will offer assistance to Kiev only if President Petro Poroshenko’s “Drang nach Osten” in the Donbass region is successful. Therefore, the end result of the civil war may affect Ukraine’s ability and willingness to pay its debts. The IMF has also given strict guidelines for Ukraine’s international reserves and has set cash-shortage limits for debt-ridden joint-stock gas company Naftogaz Ukraine.

(The IMF demanded an increase of up to 40 percent in residential gas rates by May 2015. The rates will go up 20 percent  every year until Naftogaz Ukraine’s gas debt has been paid.)

Historically, countries left on their own in talks with the IMF have often found themselves in danger of sovereign default. The IMF today is anything but a welfare institution — it does not normally assist countries engaged in war.


Ukraine’s government will have to increase domestic gas prices to reach a level on par with the IMF’s standards. This means that in 2015, the Euromaidan babushkas will receive their first 250-euro monthly gas bills. Ukraine’s energy officials often mention their ambitious plans to use fracking or reverse flows from Slovakia and Poland to make up for any gas shortfalls. In reality, the so-called “big gas reverse from Slovakia” would provide for only about 15 percent of Ukraine’s gas needs (after deducting the natural-gas consumption in the Crimea and the Donbass region). In any event, the price of this reversed gas would probably be close to the European contract price.

In regard to fracking, Ukraine’s shale projects are either half-dead or have been officially halted. The European Commission is much more skeptical about shale gas than it was two or three years ago. “Shale gas extraction will bring about no significant reduction in Europe’s dependence on gas imports,” claimed European Energy Commissioner Günther Oettinger in an interview with B.Z. am Sonntag. Oettinger said that in the long-term future, Europe will be able to cover around one-tenth of its overall need for gas by using fracking technology.

Therefore, the government in Kiev may start siphoning European gas out of Ukraine’s transportation system in order to make up for a shortage of natural gas despite all its solemn promises. The media’s fear mongering will be used to portray social unrest as a threat to national security. Meanwhile, Ukraine’s smart prime minister, Arseniy Yatsenyuk, announced his resignation in response to parliament’s failure to pass gas legislation (abandoning the sinking ship of Ukraine’s economy just in time).

In July, Ukrainian Energy Minister — and Yatsenyuk’s successor — Volodymyr Groysman, announced Kiev’s midterm plan. He does not think that either the $5.3 billion Ukraine currently owes for gas or its refusal to make regular payments “will stop Ukraine from buying gas from Russia.” In the light of Ukraine’s newfound European identity, Mr. Groysman should try this tactic during talks on receiving reverse gas supplies from Slovakia and Poland.

However, if the solidarity with Europe plan does not work out, Kiev’s last resort will be its notorious tactic of “taking without paying.”

“We know from experience that in winter and autumn Ukraine needs natural gas. And it may be — if you’ll forgive me – that they will begin to steal it,” predicts Sergey Ivanov, the chief of staff of the presidential administration of Russia.

The punitive operation in eastern Ukraine has ruined the country’s reputation as a reliable transit route. The recent shoot down of a passenger airliner in Kiev’s zone of control is a sign that it’s actually a zone of chaos, and it’s widening. But the solution to the transit problem, at least, is obvious: Kiev should pay its bills and stop using political arguments in its gas talks.

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The Real Reason Shell Halted Its Ukrainian Shale Operations

The Real Reason Shell Halted Its Ukrainian Shale Operations

Royal Dutch Shell has blamed air strikes by the government in Kiev against its own citizens in southern Ukraine as the reason it decided to declare a halt to its shale oil projects in the troubled region. In reality, the truth may be closer to the fact that company is disappointed with the economic viability of what it once thought was a large shale deposit and is looking for a way out.

After a series of dramatic statements and the signing of a $410-million letter of intent, a veil of uncertainty is being drawn around the myth of Ukrainian shale. Royal Dutch Shell CFO Simon Henry said in an interview with Bloomberg TV that the decision was prompted by the need to protect the company’s business interests in Ukraine.

By walking away, Shell will be able to “freeze” its involvement in the failed initiative while simultaneously minimizing the damage to its reputation. In accordance with the contract, Shell’s Ukrainian counterparts will, in the end, have to wait another 50 years to get their hands on that long-awaited “freedom gas.”

Shell will also be able to demonstrate its concern for its employees who work in the region where a brutal civil war is on the verge of breaking out. “Shell is in the East, and there’s a security risk there,” said Anders Aslund, a senior fellow at the Peterson Institute for International Economics.

According to a recent statement by the former head of Royal Dutch Shell, Peter Voser, “the company is now analyzing its business in shale,” which, translated from the streamlined language of press releases, means: The project is not earning its keep and we need to do something (Read: write off expenses).


A little background: In January, 2013, Shell, along with Nadra Yuzivska, LLC and the Ukrainian government, signed a production-sharing agreement for the exploration, development, and extraction of hydrocarbons from the Yuzivska site (8,000 sq. km), a geological formation located in the Kharkiv and Donetsk regions.

By the middle of that same year, the company had lost $2.4 billion on shale gas deposits in the U.S. and was forced to document a very large drop in profits — 60 percent over the same period in 2012.

Shell’s first disappointment in the Ukrainian gas market turned out to be related to the quality of the metal in the pipes that Ukrainian post-Soviet industry was capable of providing. At the time, company spokesmen claimed, “We have repeatedly stated that we are prepared to use Ukrainian goods, provided that the price and quality can meet that of foreign equipment.

But at this stage, those pipes do not yet exist in Ukraine. Shell lobbied Ukraine’s Interdepartmental Commission on International Trade to have seamless steel casing pipes and production tubings with an outside diameter of up to 406.4 mm. brought in from Japan. Of course it was impossible to avoid having all this reflected in the final price of the project.

In March of 2014, it became clear that the Belyaevskaya-400 well Shell had drilled in the Pervomaysk district of the Kharkiv region in search of shale gas was not going to return a profit. Not only were there no pipes, there was no gas. “Gas was not found in our district. Exploration work proved that it wasn’t there,” the head of the Pervomaisk district state administration of the Kharkiv region, Viktor Namchuk, admitted on Feb. 28, 2014.

As in many other Eastern European countries, optimistic predictions about the amount of recoverable shale gas turned out to be several times higher than the realistic assessment of the reserves.

Likewise, Ukraine’s neighbors – Lithuania, Bulgaria, and Poland – have also seen shale projects shut down because they turned out to be less than economically viable. By the spring of 2014, Total, Chevron and Eni had also abandoned many shale projects in Eastern Europe for various reasons.

The current heated situation in Ukraine means that politicians in the EU and U.S. cannot announce the suspension of exports from the “shale revolution” in the region, but the business community has already begun to head for the exits.

Originally published by

See also:

What Happened to Eastern Europe’s Dreams of a Shale Revolution?


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